Crowdfunding is harnessing the power of technology to modernize the centuries-old practice of real estate syndication and, in the process, is putting institutional quality real estate deals at the fingertips of today’s investors.
A real estate syndicate is a group of investors who pool their capital to buy or build property. Combined, individuals and companies have more buying power than what they could manage on their own. Syndicates are commonly structured as special-purpose entities, such as limited Partnerships (“LPs”) or limited liability companies (“LLCs”). Despite the legal form it takes, a special purpose entity is the method by which investors purchase the real estate, such as an apartment complex, office building or even a portfolio or property fund.
A Brief History of Real Estate Syndication
The practice of teaming up to acquire real estate has a long history that goes back hundreds of years, but for most of the 20th Century it has been relatively clandestine. It used to be that real estate entrepreneurs (now known as “sponsors”) could advertise their investment ideas to anyone; the term of art for this practice today is “public solicitation”. However, the Securities Act of 1933 required all new securities offerings to be registered with the Securities Exchange Commission (“SEC”) so that the federal body could provide oversight and protect investors from fraud. Of course, registering each offering and jumping through the necessary hoops made syndication far less efficient.
Public vs. Private Syndication
Luckily, though, the SEC promulgated “safe harbor” rules that allowed for sponsors to avoid registration under certain conditions. However, the safe harbors did not allow for public solicitation. Therefore, sponsors had two choices: 1.) raise money without public solicitation and avoid registration, or 2.) register the securities with the SEC, wait for approval, and then solicit investments from the public. The prior is almost always more efficient for sponsors, and therefore they almost always choose private syndication.
Although the Securities Act of 1933 effectively stopped public solicitation, private syndication continued. Such deals forced syndicators to gather capital from their own private “black book” of moneyed sources that often included members of the country club set, family trusts and working professionals, among others. Those real estate syndications were put together quietly and relied heavily on personal connections or brokers.
One notable example of the power of syndication dates back to the early 1960s when a group came together to acquire the Empire State Building in New York City. Syndicators reportedly sold about 3,300 ownership shares at $10,000 each to own a piece of the prestigious 102-story building, which at the time was one of the tallest buildings in the world.
Modern Day Syndication: Crowdfunding
These days, crowdfunding firms are writing a new chapter in the evolution of real estate syndications. The Jumpstart Our Business Startups (“JOBS”) Act of 2012 directed the SEC to allow public solicitation without registration so long as all purchasers are accredited. Hence, we have Rule 506(c) which does just that. The JOBS Act is widely credited with launching the crowdfunding industry. Effectively, crowdfunding platforms are leveraging online technology to create a new, efficient place for real estate syndication that bridges the gap between syndicators and a much larger pool of investors. Because they can reach a wider audience, sponsors have a tool that enables them raise capital more quickly and efficiently manage and grow those new relationships. Also, individuals can now easily identify and invest in real estate opportunities anywhere in the country via the online crowdfunding marketplace. Real estate investing via syndications is an established practice with a long track record of delivering results to both sides – syndicators and investors. Crowdfunding firms such as CrowdStreet are simply layering technology on top of that practice to create a new online platform that makes real estate syndication transparent, efficient and scalable for the first time in its history. Online real estate syndication has the potential to launch a new era of real estate investing. That is already evident in a crowdfunding investor that has experienced explosive growth in just a few years with even more growth ahead.
INVESTORS: Starting Investing with just $10k using Crowdfunding
CrowdStreet provides individual investors, institutional investors and family offices the opportunity to directly invest in institutional-quality commercial real estate offerings via the CrowdStreet Marketplace with as little as $10,000. To register for a free investing account please click JOIN NOW.
SPONSORS: Learn More about Crowdfunding and Digital Syndication
Qualified sponsors can apply to list their offerings on the CrowdStreet marketplace. Enterprise-level sponsors can also present investment offerings to their existing investors under their brand and through their own website by deploying the CrowdStreet Connect software platform. To learn more about CrowdStreet online fundraising and investor management solutions, please visit www.crowdstreet.com/business or complete a GET STARTED form.